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Business Rescue, Turnaround and Retention for SMME&C’s
Revised Report 2 of 2
Small Business Distress and Recovery Strategies
Prepared by: Enterprises University of Pretoria (Pty) Ltd
Prepared for: Department of Small Business Development
Date: 15 December 2017
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ACKNOWLEDGEMENTS
The authors gratefully acknowledge inputs received from all stakeholders of the Economic
Cluster and participants including the subjects of the research, the representatives and the
principal. Without their input, this research would not be possible.
This research was commissioned by the Department of Small Business Development (DSBD).
Table of Contents
REPORT OUTLAY............................................................................................................. 6
EXECUTIVE ABSTRACT ..................................................................................................... 9
1. BACKGROUND FOR UNDERSTANDING THE CONTEXT OF THE RESEARCH ........................... 11
2. THE INDUSTRY STATUS QUO .................................................................................... 15
3. DISTRESS CHARTER AND FORUM CONCEPT AS PREREQUISITE FOR MEANINGFUL PROGRESS 26
4. ASSESSMENT OF DISTRESS AND VERIFICATION OF REASONABLE PROSPECT ...................... 35
5. INTERVENTION STRATEGY PLAN ............................................................................... 44
6. INITIATIVES TO CONSIDER IN THE STRATEGY ............................................................... 49
7. SUMMARY AND THE WAY FORWARD ........................................................................ 58
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ABBREVIATIONS AND ACRONYMS
Abbreviation/Acronym Description
ACO Assessment of Company Opportunity
ADR Alternative Dispute Resolution
BA Business Advisor that focuses on development and retention
BR Business Rescue
BRE Business Rescue Event
BRP Business rescue practitioner
BRiL Better Return than in Liquidation (S128(1)iii)
CIPC Companies and Intellectual Property Commission. CIPC is also referred
to as the Regulator.
CASP Comprehensive Agriculture Support Program
DA Distress Advisor who can identify distress and bring to the attention of
forums
DC Distress Charter
DSBD Department of Small Business Development
DTI Department of Trade and Industry
DoL Department of Labour
DPW Department of Public Works
PCF Post Commencement Finance (funding)
NSB Act or NSBA National Small Business Act
QRPA Quick Reasonable Prospect Assessment
RP Reasonable Prospect
SB Small Business
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SE Severity evaluation
SCCL Specialist Committee on Company Law
SMME Small, Micro and Medium enterprises
SMME&Cs Small, Micro and Medium Enterprises and Cooperatives
TAS Turnaround Situations
TP Turnaround Professional
TMA Turnaround Management Association – SA chapter of the International
body
ZoI Zone of Insolvency
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DEFINITIONS AND EXPLANATIONS
Term/Concept Description
Appointment of BRP A firm that voluntarily files for rescue appoint the BRP. Alternatively a
court may appoint a BRP. Thereafter licencing must be completed.
Business Interchangeably used with firm, organisation, enterprise, company or
venture.
Distress Charter Meaning the pre established “agreement” to pursue collective
responsibility for a distress response in SMMME&C’swithin the
economic cluster
Licensing of BRP Following appointment, an application for an “ad hoc” license is
submitted to the CIPC
Opinion Opinion is often not fact based and highly variable. These were obtained
during interviews of various kinds with different subjects representing
different relevant groups.
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REPORT OUTLAY
This report is the second part of the research has as its main aim to report on the status quo
of the SMME&C sector in SA, its key governmental stakeholders, their feedback during the
research and secondly, to propose strategies for the different business types. It builds on
Report 1 which was aimed at firstly understanding the status and theory of small business
distress and recovery outside and within Chapter 6 (business rescue) as regime.
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Chapter 1 Is a brief reiteration of the brief from the principal and consequent
approach in short. It refers shortly to the research methodology.
Chapter 2 Description of the industry by elaborating on the status quo situation that
considers binding constraints and accelerators for turnaround and business
rescue in association with governmental interventions.
Chapter 3 Proposal on a Distress Charter for the industry to address the main binding
constraint and a proposal to use the Forum principal to govern
interventions required by the strategy plan interventions.
Chapter 4 Explores the assessment of distress that in the required first step that must
be executed by the forums. The QRPA process is crucial to trigger the
relevant strategies to pursue.
Chapter 5 Proposed the key document to drive decision making namely the
Intervention Strategy Plan (ISP).
Chapter 6 Report the key strategy initiatives that are proposed to any forum for
consideration.
Chapter 7 Summarises and concludes.
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EXECUTIVE ABSTRACT
Report 1 has identified the relevant associated issues that drive and restrain the turnaround
and BR industry with specific relevance to the SMME and the cooperatives sector. It explains
that business rescue may be regarded as an effective formal turnaround procedure despite
its early “childhood” problems. Regardless of some restraining forces, it appears to save jobs
and businesses similarly to that achieved by international regimes.
Report 2 reported the findings as a status quo situation of the SMME economic sector. It
applied the strategy consulting process by stating the situation (from findings) and thereafter
proposing some potential strategies for the application.
At this point it is important to recognise that the proposal contains generic process steps as
it is not possible to address the unique environmental contexts for each individual venture
under consideration.
Report 2 proposes that a Charter be established to govern the intervention processes. The
Charter governs the Forum concept that addresses the acumen paradox specifically.
Additionally it has several benefits for enhancement of both more and better viability of
ventures.
Guidelines for the forums to enhance decision making is proposed. It specifically proposes the
quick reasonable prospect analysis (QPRA) as central to the operations of the forums.
Especially forums must respond to the unique distress situations and consider the level of
analysis for the different levels of micro, small, medium and cooperatives.
The key content of Report 2 includes inter alia:
1. Background and industry analysis
2. The research process.
3. The status quo view on the industry
4. Proposal on Charter and Forums principle
5. Intervention strategies proposed for each level of business
6. Assessment processes that may assist assessors to determine the appropriate strategies
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SMALL BUSINESS DISTRESS AND RECOVERY – BACKGROUND AND STATUS
QUO
Chapter 1
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1. BACKGROUND FOR UNDERSTANDING THE CONTEXT OF THE RESEARCH
1.1. Brief restatement of the context of the research
The research has been conceived and commissioned by the DSBD (Department of Small
Business Development) with the following specific guidelines (but not limited to):
Terms of Reference requires:
1. Engage industry stakeholders and
2. Investigate strategies for SMME’s and cooperatives to achieve and apply by
stakeholders. These are categorised as:
a. Rescue strategies
b. Turnaround strategies
c. Retention strategies
By default, the brief guided the research approach to focus on addressing the
requirements of SMME’s and Cooperatives to survive distress and thereby add to
economic growth and employment creation. However, it was not possible to separate
Figure 1.1 The research delimitations
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the SMME&C strategies from that of the stakeholders. Therefore Chapters 3 deals
with the Charter prerequisite and Forum concept while Chapter 4 focuses on
reasonable prospect that will inform the process.
In this document, the word “venture” is often used as synonym for SMME or
Cooperative.
1.1.1. Brief methodology of the research
In this section, the applied research process is briefly described. This is necessary to
ensure validity of the data collection for Report 2 and the analysis and interpretation
thereof. The governing principle of the research design was to optimise
“triangulation” (multiple sources of data) as to ensure no oversights. The previous
and next diagrams show the process agreed upon by the DSBD committee on
appointment. As the brief required, the study focus is on business rescue,
turnaround and retention at the various small business levels.
1.2. Underlying philosophy of researchers
The research followed a philosophy of the dialectic conversation. This means that
during interviews the interviewees were challenged by statements and opinions only
after they offered their initial opinions on the interview questions. The different
researchers in the team then entered into a similar conversation to triangulate the
data collected.
1.2.1. Research focus of Reports 1 and 2
Figure 2.2 depicts the focus of the study. It shows the requirements to address
retention of SMME&Cs and address turnaround (including rescue), to assist them to
remain active in the industry.
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1.2.1.1. Data obtained from stakeholders to inform the research
Report 2 depended largely on stakeholder inputs. These were obtained through an
interview process. A protocol was designed to initiate the semi-structured interview
process and ensure consistency. Stakeholder inputs were obtained from individuals
at various management levels and experience within the economic cluster. This
allowed for helpful information to pursue more in-depth investigation.
To pursue trustworthiness, the draft document was widely distributed to members
of the committee as well as the cluster.
Figure 2.2 The research design within the relevant context that was pursued by this research.
Note the research focus.
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Small Business Distress and Recovery – Industry status quo description
Chapter 2
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2. THE INDUSTRY STATUS QUO
Turnaround procedures involve going beyond the normal managerial responses to
business troubles. Therefore, a business in distress may not necessarily require a
turnaround response if during the ordinary course of business, it’s troubles will be
resolved. It is useful, therefore, to see turnaround as a major intervention necessary to
avert eventual failure of the company. This may operate through informal mechanisms
as well as formal legal processes.
2.1. The restructuring industry
The restructuring industry worldwide is often referred to as complex as it intersects
with insolvency law and practice with no “one fits all” process. Nowhere is it better
described than by Professor Arnold, in 1943 quoted in the next figure. He describes all
the elements to be considered in reorganisation. Although Professor Arnold is focused
on corporate firms, experience has shown the same can be said about SMMEs in
distress. It is accepted that SMME&Cs do not share the same difficulties as corporates,
therefore, dealing with distress may require a different approach.
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We proceed to describe the stakeholder interventions based on the research of
documents, web sites and interviews for all the members of the economic cluster
and beyond.
2.2. Stakeholder interventions in the sector
Roles of stakeholders vary. Stakeholders as defined by the participants in the
“Economic cluster” contributed with different inputs as well as different levels of
input. The types of inputs are mainly two-fold namely:
2.2.1. Financial resource inputs
The aim of these resources is funding and access to funding. Typically done through
NEF, SEFA, IDC, DBSA.
2.2.2. Non-financial resource inputs
The aim of these resources is to support and develop human capital, infrastructure,
production capacity, create access and cooperation between participants and
industry. Typically done by SEDA, DTI, DoL, DPW, Productivity SA etc or in temporary
joint structures.
2.3. Generic SMME&C growth principle framework
Presented in the next diagram is a single presentation of the SMME&C restraining
and driving forces which was also confirmed by interviewees during this research.
While distress is generally attributed to unique circumstances of the individual
venture, these are some generic forces that all SMME&Cs may face during a life time.
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2.3.1. Restraining forces
Restraining forces are those that hamper the growth of the venture and may
originate externally (strategic origin) and internally (operational). These forces are
reiterated as it is crucial for the strategy chapter to follow. Strategic factors often
influence product/service demand as well as being outside of the control of the
venture.
2.3.2. Driving forces
Driving forces have to do with factors that determine the existing outcomes as
pursued in the mandates of role-players. It closely intersect with “intangible” forces
(assets) such as education, operationalising a business, cognitive action,
entrepreneurial motivation, entrepreneurial skills and business skills of the
entrepreneur.
Both restraining forces and driving forces have direct impact on reasonable prospect
which is the main theme of Chapter 4.
Figure 2.1 Restraining and driving forces of SMME&Cs (Not from this research)
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2.3.3. Entrepreneurial capacity in failure
It is critical to understand
that SMME failure originates
from entrepreneurial
inability to respond to
external and internal
demands associated with
sustainable operating of the
venture.
For the purposes of this report, a key distinction should be made between start-up
failure and business failure. While both inevitably result in the foreclosure of a
business, there is a contrast in the nature of failure. First off, SMME’s are driven by
profitability and stable long-term value, while start-ups are focused on top-end
revenue and growth potential. Seven to nine out of ten start-ups (depending on
country) will fail however, this may be regarded as a natural failure rate. Therefore, it
is critical to distinguish at this point the difference between entrepreneurial failure
and business failure. While entrepreneurial failure can certainly induce business
failure the converse cannot. The notion of turnaround however only applies to
business failure and cannot be used to prevent start up failure.
2.4. Introduction to the status quo findings
A Key Observation
Finance (or access to finance) is not the real issue as many people believe. The reality is
that a feasible business plan (or rescue plan) will unlock access funding any day.
Therefore the importance of the reasonable prospect assessment later in the document.
Sustanable impact of financial resource inputs remains problematic for performance
monitoring
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This section gives an industry perspective and builds on the previous section where
the generic distress framework was presented. Within the industry and based on the
findings several constraints and accelerators have been identified. Only the five key
constraints and accelerators are explored.
2.4.1. Binding constraints
The fragmentation effect appears to be experienced by most interviewees but is also
not unknown to most officials. However, it limits actions of collaboration between
stakeholders. Fragmentation refers to “working in silos” while different sector
members needs the same information and cooperation which unfortunately does
not happen.
Given the high level tacit knowledge (related to competence) and business acumen
required as competencies by advisors, the officials themselves as well as appointed
external advisors lack these in general. It appears that some of the relevant advisor
skills were identified in the Productivity SA system but they also acknowledged it as
a constraint.
Fragmentation effect is characterised by low levels of coordination, cooperation,
alignment and sharing of information by the relevant participating stakeholders.
Most inteviews highlighted this problem to exist despite it being acknowledged by
rolepayers.
Fragmentation is not blamed on anyone – It must be acknowledged as the “nature
of the beast” suggesting alternative seeking within the “COMPLICATED” nature of
the governmental structures.
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Interviewees reported that there appear to be sufficient resources (financial and
non-financial) available to assist SMME&Cs to address their development needs and
shortcomings. Simultaneously, the pressure on stakeholders comes from measuring
how much resource inputs they achieve. This “push effect” creates situation where
more and more non-feasible ventures are funded leading to more and more
distressed ventures and failures – this is referred to as the resource-feasibility
paradox and which is explored further in Chapter 3. “This has led to throwing more
good money after bad businesses” as was stated by one interviewee.
Also reported is the absence of a “philosophy of enterprise development” rather
than just executing mandates to achieve measured goals. This may be due to several
shortcomings and addressing this will require a significant concerted effort as it
involves a culture change within stakeholder operations. It will have to go hand in
hand with intensive general business training for officials, especially in turnaround
and rescue for specific stakeholders. Within this category of constraints is incuded
the absence of aftercare and measures to support more than “financial inputs”. It is
clear that this capacity appears absent from the capacity of the the departmental
structures and advisor skills and competencies.
Figure2.2 Constraint and accelerator factors (based on this research)
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Standardised tools to measure and determine the status of the businesses supported
appear absent. These may include existing tools such as opportunity -, reasonable
prospect -, going concern -, feasibility -, viability -, due diligence - and likelihood of
liquidation1 models. Commercial banks have extensive tests that they apply. While
advisors are required to have access to such tools, these is limited (see
fragmentation above) while application and collaboration for its use coordination.
2.4.2. Accelerators
The governmental
system and
stakeholders are
governed by
policies as well as
the mandates,
visions, missions
and core business
statements that
appears to be being
pursued by the different stakeholders.
There are initiatives specifically addressed to improve selection of external advisors
to address the skills gap reported. There are also many initiatives undertaken by the
various stakeholders. However, the effects of these appear in isolation.
Individual stakeholders reported various processes and initiatives that are working
well including: individual data bases, software such as CASP (Comprehensive
Agriculture Support Program), small business register, gazelles program, NEF post
investment monitoring, diagnostic analysis exercise undertaken by SEFA, extension
recovery program etc.
1 Rosslyn-Smith, R, 2017. PhD under examination titled: A liabilities approach to the likelihood of
liquidation in business rescue
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2.4.3. Turnaround and Business Rescue status
The initiation of this research pre-empts the conclusion that very little if any systems,
processes and initiatives that address turnaround and business rescue do exist
currently within the economic sector.
This was confirmed by the research.
However, there exist some systems aimed at evaluation processes to retain
businesses across sector members. Simultaneously, the constraints (especially
fragmentation) mentioned above do hamper the execution thereof. Much of these
are advisor dependent as one criterion to enter the current advisor databases (ex.
SEFA and Productivity SA) is to prove that the advisors have access and mastery of
the use of such processes. The principle of the system to use this “non-prescriptive”
approach leans towards flexibility and variation but appears to have limitations. The
main limitation of pursuing flexibility is that there is no universal application
standard for stakeholders. This leads to no accumulation of skills within the
stakeholder departments – thus aggravating the skill deficiencies instead of
improving them.
A Key Observation from the figure above, is that focus must steer towards finding
“better” rather than pursuing “more”
The challenge is therefore not to only increase the number of economically active
businesses (enhanced number of start-ups) – this appear to be achieved but it faces the
resource-feasibility paradox. What is central to this report is to address the quality of
businesses, thus finding better business to support and grow thus retention. Proactivity
is presented as a prerequisite for turnaround while rescue more reactive.
Evaluating distress has the same purpose namely to identify “better” venture to support
in turnaround of business rescue.
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Literature has shown that an inherent problem to distress and operating in the ZoI is
absence of early cognition. Previous business rescue research2 and this research has
again confirmed it in practice within the South African environment.
Therefore, the principle of regular monitoring that can inform management is essential.
2.4.4. Business rescue – Chapter 6 relevance
The research indicates that there is little application of Chapter 6 business rescue for
small and micro business as well as the cooperatives.
The next diagram shows typically the relevance (not statistically proven) of formal
business rescue, informal turnaround and retention within the the different
categories within the SMME&C industry in SA. The likelihood of theses interventions
is presented as follows.
2 Pretorius, 2015. Business Rescue Status report to CIPC.
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From the above it is clear that the BR is considered more relevant for bigger business
and not at all for the cooperatives. Turnaround has more application value for
SMME’s as it affords some flexibility for responding.
This figure highlights the point that Chapter 6 requires some revisions to include
these businesses in the use of the legislation. Specific adjustments are required to
increase access for the smaller forms of business.
2.5. Chapter summary
The status quo of the SMME&C industry in South Africa bears similar characteristics
as most developing countries. Simultaneously, the government has many programs
that highlight the associated development of SMME&Cs by resource injection.
Additionally, redress of past discrepancies is high on the mandate priorities. This
resulted in a push strategy to enhance resource dissemination leading to the resource-
feasibility paradox. The DSBD therefore initiated this research to propose strategies
to address business rescue, turnaround and retention of SMME&C.
This chapter expanded the specific findings for the environmental status of the
industry by reporting the binding constraints and accelerating factors faced by the
industry.
The accessibility of formal BR in Chapter 6 was highlighted to indicate the requirement
of ammendments to assist smaller ventures.
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Small Business Distress and Recovery Principles
Chapter 3
Requirement for a Distress Charter
and the Forum concept
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3. Distress Charter and Forum Concept as Prerequisite for meaningful
progress
Considering the main constraint for stakeholder within the industry, there is a need to
address fragmentation, improve resource utilisation and establish “collective
responsibility”. While this report cannot be descriptive nor have the power to dictate, it
proposes the Charter be accepted as a principle and thereafter be initiated and
developed.
3.1. Establishing of the Distress Charter (DC)
The Charter addresses the main concerns of stakeholders. It is a proposed initiative to
assist all SMME&Cs who are beneficiaries to the services of the stakeholders as well
as the stakeholders themselves.
3.1.1. Distress Charter – What is it?
The Charter is an agreement of cooperation and coordination between stakeholders
to address fragmentation effects (See also Sub-section 2.4.1 on binding constraints).
It suggests a structure to take responsibility for enhanced collaboration and
information sharing to enhance the operational efficiencies.
This proposal is not prescriptive to establish a new structure. The relevant structure
may be an existing structure with extended mandate to fulfil this role towards
distress actions within the economic cluster.
The proposed structure could be the existing Coordination body within the
economic cluster to extend its current operations to address the specific needs for
addressing distress within the industry – Therefore the concept of DC.
3.1.2. Motive for establishment of the Distress Charter
Considering the aims of the Charter, the following serves as its aims and actions:
3.1.3. Aim and actions of the Distress Charter
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The Charter is established as a vehicle for cooperation and integration with broadly
the main goals that the Charter must pursue include:
3.1.3.1. Enhance collaboration within and between stakeholders
3.1.3.2. Information gathering
Lending to SMME’s in the private sector is typically conducted through local
“relationship” managers, after which routine monitoring and risk assessments of the
debtor is carried out. If the performance of a business is flagged as underperforming
or in distress, the debtor is usually transferred to a central ‘intensive care’ unit.
Within this unit specialist staff act with a single objective of turning business
operations around. If after a preliminary evaluation the debtor’s situation
deteriorates under generic remedies, then an independent business review is
requested. The function of that review would be to build a bridge between the state
funder and the troubled company’s management in order to find a solution – which
might or might not be using business rescue. The whole process, in terms of creditor
concentration theory, amounts to an information-gathering exercise initiated by the
concentrated creditor that generates benefits for other creditors in terms of
improved quality decision-making.
3.1.3.3. Address fragmentation
3.1.3.4. Enhance information sharing
3.1.3.5. Improve the efficiency of current resource application
3.1.3.6. Create forum guidelines to support individual SMME&G projects
3.1.3.7. Bring alignment between and within participants
3.1.3.8. Role clarification and directives to participants
3.2. Establishing of the Forum concept
3.2.1. Forum – what is it?
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Forums are small bodies of 3-5 persons that has know-how and information access
to guide the affected/selected SMME&C in remaining a going concern. Participants
respresent certain stakeholders that contributed (or will contribute) resources to the
venture and therefore assists in the responsibility, accountability and governance
triangle. These bodies are made up of stakeholder representatives who are relevant
for financial, other, industry specific inputs.
Forums are similar.3 to what is used by Productivity SA for decision making in a
turnaround project. Typically the play the role of a board of directors which are
virtually absent from the SMME&C industry in its totality.
Forums can be responsible for more than one SMME&C (See Forum Structure –
Compilation)
Its function is advisory and access to acumen, thus they can “contract” a specific
acumen when required from pre-vetted external acumen providers.
The forum is also key to pursuing the regular monitoring principle.
3.2.2. Motive for establishment of the forum concept
3 Turnaround solutions – Annual Report 2015-2016 of Productivity SA, p9.
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Underlying the establishment of forums is a two-fold paradox. First, the resource-
feasibility paradox (See also Sub-section 2.4.1). As shown in the diagram, practice has
reported that it is continuously happening and leading to downstream problems.
Second, the acumen paradox is highly relevant as seen the two diagrams to follow.
Lastly, the forum ensure transparency leading to objective decision making.
The forum is the first step in addressing this paradox. It does so by changing the focus
of the resource input while simultaneously addressing the feasibility problem. Chapter
4 expand on the strategies to be pursued.
The underlying driving motive of every forum is targeted to direct the specific
challenges of a specific SMME&C when appropriate, such as when applying for
support, to enter a value chain, participate in a larger project, require additional
resources etc. It functions on a “project basis”.
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The next figure explains the acumen paradox.
Every forum thus has as its aim to address the paradoxes. This can be achieved through
the following routes:
Development of the strategy initiative plan –(See Chapter 5)
Establish regular monitoring system
Decide on TP, BRP or consultant
o Selection of the BRP
o Selection of the TP
To identify and access acumen as resources
To establish / enhance generic governance
To direct and improve development of SMME&G management
To develop accountability – both SMME and stakeholders
To access new opportunities
To pursue innovation and alternative value models
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To apply reasonable prospect for turnaround or BR
To develop relevant venture score-cards
To scale operations
Other
3.2.3. Aim of Forum
In line with the Charter aims and actions, the output pursued for each forum is direct
decision making for the relevant venture to ensure it remains a “going concern”. This
it pursues through regular (quarterly) meetings and ratification of the following:
3.2.3.1. Continued and regular reasonable prospect assessment
The regular determination of reasonable prospect becomes a systematic
application to ensure viable businesses and early detection of potential future
distress.
Early detection is absolutely critical to meaningful responding to distress. It allows for
turnaround to be pursued rather than rescue.
It is therefore critical to have regular forum meetings that can establish regular intervals
for the monitoring process.
3.2.3.2. Going concern decisions of relevance
The reasonable prospect determination is also relevant for the going concern
determination while it acknowledges the existence of illiquidity versus
technical insolveny.
3.2.3.3. Overall strategy changes for improved effectiveness
3.2.3.4. Repayment plans and scheduling
3.2.3.5. Accountability enhancement
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3.2.3.6. Efficiency plans for business enhancement
3.2.3.7. Other
3.3. Application of the forum concept
Once the Charter agrees on the forum concept, it directs the formation of the forums
and their formulation with some important operating guidelines. Typically a forum will
be established depending on the requirements of the specific venture. Whenever
outside acumen is required for a specialised industry, it is “contracted” externally.
The broad process for the forums is shown in the diagram;
3.4. Chapter summary
This chapter described the requirement for a Charter and proposed the forum concept
to address the binding constraints as reported in Sub-section 2.4.1.
The proposed Charter defines the cooperation and collaboration between
stakeholders to govern the operation of the forums which are the vehicles to address
the paradoxes. Within this framework, SMME&Cs can function optimally
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While the aim is to govern intervention directed at mainly turnaround and business
rescue as strategies, it automatically provides for retention decisions too.
The forum concept is described shoed showing how it can be constructed, how it
operates and the process of its actions. Key to the process is that it should meet
regularly and consistently with pre-emptive focus. .
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Small Business Distress and Recovery Principles
Chapter 4
Assess distress and verification
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4. ASSESSMENT OF DISTRESS AND VERIFICATION OF REASONABLE PROSPECT
Chapter 3 has mostly stated and elaborated the requirement for a Charter and the forum
concept as pre-requisites for meaningful progress in the SMME&C. This chapter proposes
an overall process and strategies to be incorporated in the forum concepts for different
ventures.
The underlying pre-requisite of the forum operation requires that a standardised
assessment process is to be established. Assessment must be done regularly to trigger
action by the relevant forum. During interviews, participants indicated that there should
be room for different methods of assessments as it provides for the acumen especially
associated with external advisors.
Assessment is pivotal in triggering the overall process of turnaround or business rescue
and even when evaluating for growth and retention.
4.1. The overall process model to inform a forum process
Figure 4.1 proposes an overall process to guide forum operations in addressing
distress and guiding rescue, turnaround and retention strategies. Each part is
expanded in the sections that follow. The numbers in the diagram indicate the
relevant chapters associated with each part. Each of the steps are further expanded
in the following chapters.
From the diagram, the observer can follow the process from the onset of distress,
executing a three step quick reasonable prospect assessment and then towards the
intervention through a strategy plan. These key steps take place within the
governance of the Charter and operations of the forum.
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4.2. Reasonable Prospect Analysis (RPA)
Once a venture has entered the Zone of Insolvency and experiences distress, the
process is triggered.
4.2.1. QRPA – what is it?
What is proposed in this section is one potential process namely a quick reasonable
prospect assessment4 (QRPA). The process involves techniques that do not necessarily
depend on financial data as pre-requisite. The reasons for this is information
asymmetry and the liability of data integrity that is characteristic of SMME&Cs. We
therefore lean towards subjective measures as they provide support for decision
making when generally there is a shortage of accurate information. Any financial data
will improve decision making.
4 Pretorius, 2017. A framework for turnaround practitioners to assess reasonable prospect for ventures
operating in the Zone of Insolvency. Southern African Journal of Business Management. Accepted
for publication
Figure 4.1 Comprehensive process design for the study
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The QRPA consist of three integrated components namely the turnaround situation
(TAS), the severity analysis and the opportunity-resource diagnostic. Each is explored
separately.
Several methodologies of assessment are available in the literature. Advantages and
disadvantages between methods vary and are supported differently by different
observers. Banks for example have their own assessments methods while “vulture
capital providers” of PCF have others, depending on the business models and
strategies. What is therefore proposed in this this section relates to methods used
by the authors in their academic positions as well as consulting interventions.
One of the Charter functions should therefore be that of establishing what the more
useful methods to be selected are.
We propose RPA as a base in this report.
The process starts with cognition5 that the venture has entered the zone of
insolvency. Thereafter it pursues the QRPA process steps.
4.2.1.1. Turnaround situation (TAS) judgement
The TAS6 judgement is the first evaluation of the specific venture situation. It
assists in determination of the unique configurations and distress causality which
specifically addresses strategic versus operational causality.
5Thrams et al 2013. Organisational decline and turnaround: A review and agenda for future
research. Journal of Management. 39 (5) July 1277-1307
6 Pretorius, 2008, When Porter’s generic strategies are not enough: Complementary
strategies for turnaround situations. Journal of Business Strategy 29 (6) 19 - 28.
http://www.emeraldinsight.com/doi/full/10.1108/02756660810917200
38
Within each quadrant of
the TAS analysis are some
indicators to guide the
decision makers about the
relevant status.
By determining the
specific situation whether
performing well (can be
associated with distress), under performance, strategic distress or crisis, it
informs the forum about the origin of distress.
The appointed forum members could establish a reasonable sense of the specific
situation without financial data. The next step is to establish the severity of the
distress.
4.2.1.2. Severity evaluation (SE)
The severity evaluation (SE)7 investigates patterns and status of the venture at
the point in time when cognition takes place. It considers specifically cash flow
for the past 3 terms (preferably monthly but quarterly could also work), gearing,
slack and industry
position.
Severity is typical
described by looking at
gearing, cash flow over
three periods before
the QRPA, Slack of
resources, A Z-score if
available and finally the typical position of the venture in the industry (such as
leader, also run, insignificant). It is important to recognise that more or other
7 Management Transfer cc - Unpublished material
39
variables are or could be relevant and used. The diagram shows the 3 main areas
by green, orange and red colours (traffic light principle) to guide the evaluation.
It is possible that a business venture may be judged to show signs of two or more
blocks simultaneously.
4.2.1.3. Opportunity-resource diagnostic (ORD)
Once the TAS and SE have
informed the decision
makers (forum), the ORD
requires a somewhat
forward looking judgment.
ORD asks the question if
there is balance between the
opportunity (perceived) and
the resources available. The nine blocks propose which element is absent or
insufficient. It is possible that both are negative and often this points to a fatal
flaw in the value model that is proposed.
Case examples of fatal caveats
Case 1: A local business was exporting 100% of their product namely medical
kits for cars to France as any car on the road was legally bound to have such a
kit on board. Along came a change in the law that eliminated this legal
requirement. Suddenly the demand disappeared (strategic distress) rendering
the business vakue model insignificant to pursue.
Case 2: Several local SMME participated in the provision of pre-paid meters to
a City Council contract. Their sole demand depended on the contract that was
disputed and found illegal – therefore all these businesses lost the key factor
of demand.
40
4.3. RPA Outcome
Combining the 3 elements of the QRPA informs the overall outcome. It correlates
with “feasibility” judgement.
RPA outcome is typically categorical in nature. The 4 broad categories of
relevance include (see also the next diagram):
RP exists with proper management (Score =3)
RP but require resource infusion (Score = 2)
RP with addressable caveats (Score = 1)
No RP as a result of fatal caveat (Score = 0)
DETAILS OF THESE LEVELS ARE EXPANDED IN CHAPTER 6.
It is important to realise that the QRPA is a value judgement based on incomplete
information and therefore subject to verification. The positions indicated in the
diagram are approximate positions.
For this study we did not include start-up failure as a result of foundation difficulties8
(See Figure 4.2).
8 Provasi, R. 2016. The ability of the turnaround index to assess going concern assumptions: evidence
from its application to Italian listed companies. Global Business & Economics Review 18 (1).
41
Each score requires alternative responses as will be explored in the next
chapters. Strategy responses to each level is expanded in Chapter 6.
4.4. Verification of the outcome
Most cases of RPA determination is associated with the liability of data integrity9.
Thus once it is established, the forum can call for verification through a due-
diligence process to confirm accuracy and trustworthiness of the data. It often
happens that RPA outcome is accepted subject to specific verifications of for
example a contract, a price, a costing, an ownership confirmation etc.
Verification is a deeper investigation, more time consuming, considers risk and
often has a financial underlay. Verification also addresses information
asymmetry.
9 Pretorius & Holtzhauzen, 2013. Business rescue decision making through verifier determinants –
ask the specialists. South African Journal of Economics and Management Sciences. 16 (4),
December 468-485. http://sajems.org/index.php/sajems/issue/view/37
Figure 4.2 RPA Outcome interpretation of levels
42
4.4.1. Other models that can be considered
Opportunity analysis10
Likelihood of Liquidation model LOL11
Due diligence
Going concern evaluations
Other
4.5. Chapter summary
This chapter expanded the RPA Interviews with relevant stakeholders to gather
information for Report 2 has already started.
The chapter describes the assessment of the distressed ventures through a quick
reasonable prospect determination the guide forums in selecting the relevant
initiatives in response.
The QRPA considers the turnaround situation, severity and resource –opportunity
diagnostic in a three step process to inform the forum of the initial judgement.
The outcome of the QRPA is described shortly but expanded in Chapter 6.
10 Nieman & Nieuwenhuizen. Entrepreneurship: A South African perspective. Editors G. Nieman,
J. Hough and C. Nieuwenhuizen. Van Schaiks. Publishing date: 2003. 1st Edition.
11 Rosslyn-Smith & Pretorius 2015 Stakeholder expectations of the business rescue plan from a South African
perspective. Southern African Journal of Entrepreneurship and Small Business. Vol 7 p1-35.
http://sajesbm.co.za/index.php/sajesbm/article/view/4
43
Small Business Distress and Recovery Principles
Chapter 5
Intervention strategy plan
44
5. INTERVENTION STRATEGY PLAN
Chapter 4 has expanded on the RPA through explaining the QRPA from entering the ZoI
until the final RPA outcome. Once a forum has established the outcome level and
verification has been done (or not), the forum is now in position to develop the
intervention strategy. These could include retention, turnaround or business rescue with
their specific associated practices. In addition, strategies for growth, expansion,
diversification, entering alternative markets etc. This chapter now expands the specific
broad strategies associated with each as well as stipulate their associated practices.
Within the brief of this report, the three sets of strategies are for business rescue,
turnaround and retention mainly although some reference to other were indicated.
Strategy decision making is a response from management to the specific contextual
conditions (external and internal environments) while considering vision, mission and
resources to pursue identified opportunities.
The potential strategies and their associated practices are unlimited and depend on the
sense-making of the RP outcome. However, researchers have identified two main stages
in the turnaround process, retrenchment and recovery. The first is when the cause of
organisational distress is found and the TP with managers are inspired to act, they are
likely to retrench or cut back to a manageable core of operations to stem the decline. This
will in effect afford the business the necessary time to deploy recovery efforts while the
business resumes what it knows best. Second, a recovery phase is entered where a
business will take the appropriate and specific actions that return them to previous
positions of security.
5.1. Strategy initiatives formalised in a plan
This chapter is about a formal plan that should be compiled under the oversight of the
forum. Normal businesses have business plans, expansion plans and growth plans.
Distressed businesses may have turnaround plans or rescue plans. These plans are
addressing similar issues most of the time.
45
The extent of such plans varies from formal to informal. Most entrepreneurs only rely
on vague plans (sometimes only in their heads).
Forums should assist SMME&C managements to develop these plans based on the
RPA Outcomes.
5.1.1. Plan components
All plans have minimum requirements. Chapter 6, Section 150, is prescriptive for what
a rescue plan should incorporate. However, this may vary depending on the specific
context of the venture under consideration. Turnaround plans may vary but address
similar concerns. What follows is a broad structure of the minimum requirements for
inclusion in the turnaround plan. Section headings are postulated.
Most funding organisations have comprehensive requirements for inclusion in
business plans.
Many business plan formats do exist in both literature and practice. Therefore, only
the headings to be considered by the forums is stated in this report.
Within the economic cluster, the ACO is used by SEDA, SEFA, DTI and Productivity
SA. It serves a similar purpose.
Turnaround and rescue plans have some elements that are additional to the
standard business plan. .
5.1.2. Intervention strategy plan components – minimum requirements for SMMEs to
include:
Short background to the venture
Clear description of the distress causality
The causes of distress are carelessly described in turnaround literature as
common, immediately identifiable internal and external issues such as
shortage of cash, poor financial control, poor management, and the collapse
46
of key markets. However, it is important to distinguish between these causes,
which are in fact secondary causes, and a deeper, more fundamental despair
that relates to organisational learning. These issues are known as the primary
causes of decline. The latter are often not clearly understood and received little
attention in theory or practice.
Origin of the distress – strategic vs operational
Value model pursued
Demand for value model
o Past demand
o Projected demand
Financial status based on last three months
Broad strategy alternatives
Specific initiatives (See Chapter 6)
Funding requirements
Projections
o Income projections
o Cash flow projections
Time lines
Score card
Specifics that are unique to the venture
Plan summary
5.2. Stakeholder support
47
Figure 4.1 indicates that if the stakeholders support the forum’s proposed
intervention strategy plan Interviews with relevant stakeholders to gather information
for Report 2 has already started. The interview protocol guideline is attached as
Annexure A.
Some respondents appeared hesitant to contribute alternatives that can be pursued.
This rather confirms that business rescue and turnaround are not widely and formally
pursued within government stakeholder structures. It acknowledges that it requires
high level acumen.
5.3. Summary
A business rescue or turnaround plan is specific to the venture it is compiled for. What
is presented in this charter are generic headings that a forum should consider for
inclusion or not.
Various plans have different levels of complexity that depend on the specific contexts
for each venture.
48
Small Business Distress and Recovery Principles
Chapter 6
Initiatives to consider in the plan
49
6. INITIATIVES TO CONSIDER IN THE STRATEGY
Chapter 5 has focused on and elaborated the strategy initiatives and components of the
turnaround plan. These initiatives inform the strategy plan whether it is a rescue plan,
turnaround plan, retention plan of whatever kind.
This chapter focuses on the initiatives to consider when selecting the strategy to pursue.
Each element requires investigation to find complete clarity and consideration by the
forum. This allows for the expansion of the forum to include specialists.
The headings (See also Figure 4.1) are the key elements that are used in “Do We have a
Business – test (DWaB-test) also known as the key elements to consider when comparing
an idea vs an opportunity for business.
6.1. Sense making of the RPA levels
Sub-section 4.3 reported the levels of RPA Outcome. Each level requires the forum to
understand and GRASP the context in which distress must be addressed.
6.1.1. Level 3 RPA Outcome – Where RP exist with proper management
For a venture with an RPA Outcome of
3, it suggests that all the “makings” of a
business still exists and following a
relevant strategy, the business can be
saved, turned around or rescued based
on a proposed plan. SE is typically low
(see Sub-section 4.2.1.3). Despite the distress, the strategy and its implementation
would probably be successful. This is typically associated with ventures that suffered
poor management decisions, did their business poorly (inefficient) but the problems
which are mainly operational in nature, can be addressed. BRPs and TPs flourish on
such ventures as they are seen as fairly easy to save.
6.1.2. Level 2 RPA Outcome – Where RP exist depending on resource infusion
50
For a venture with RPA Outcome of 2, it suggests that most of the “makings” for a
business exist pending the infusion of additional resources (typically refinancing) as
part of the relevant strategy. The severity evaluation (SE in Sub-section 4.2.1.2) is
medium overall. Such ventures can be saved, turned around or rescued based on a
proposed plan containing a willing participant to provide resources. Despite the
distress, the strategy and its implementation could probably be successful. Most
distressed ventures claim to only require external finance (debatable). This is
typically associated with ventures that require alternative assets / technology to
address inefficiency problems. BRPs and TPs with specific business industry acumen
can save such ventures as they are seen as fairly easy to solve.
Previous research has shown that formal business rescue under Chapter 6 in South
Africa, the success rate was 9.4%.
Success incorporated restructuring to solvency as well as BRiL.
6.1.3. Level 1 RPA Outcome – Where RP exist only after fixing an addressable caveat
For a venture with RPA Outcome of 1, it suggests that the “makings” for a business
are depleted and the SE shows low levels. A relevant strategy may be formulated
pending both resource infusion and addressing external limitation such as new
markets, alternative production, outsourcing etc. The venture can be turned around
or rescued based on a proposed plan but is risky. Despite the distress, the strategy
and its implementation could probably be successful depending on the nature /
causality from any caveats. This is typically associated with venture that suffered
both poor management cognition of environmental threats and [no or incorrect]
responses. It suffers both strategic and operational threats. While problems can be
addressed, it is high risk. BRPs and TPs require expert acumen for such ventures as
they are seen as high risk to solve.
6.1.4. Level 0 RPA Outcome – Where no RP exist a.r.o fatal caveat/s
51
For a venture with RPA Outcome of 0, it suggests that the venture faces a caveat that
is fatal in nature. Such a caveat can be loss of a major contract on which the venture
was established or innovative substitutes in the market etc. The venture may have
some of the “makings” but a crucial one is absent and cannot be addressed. No
strategy can work and either a BRiL or liquidation route is relevant. Occasionally it is
possible to be acquired by another venture but this forms part of BRiL alternative
anyway.
6.2. Decision making
The RPA Outcome is a determination that govern the next steps. It represents a crucial
decision making point within the overall process. The decision context contains
distress within the ZoI which is characterised by uncertainty, complexity and
ambiguity. The forum allows for wider insights in often volatile circumstances.
6.3. Categories of strategy interventions
In this section, a list of 7 categories are identified for attention by the forums. This list
is not exhaustive but contains the key considerations that can govern the turnaround
or rescue strategy choices (See also Figure 4.1).
From the categories, note that each category name contains a verb/adverb describing
the action to be considered.
Figure 4.1 also shows an arrow pointing backwards from the initiatives towards the
Intervention strategy plan suggesting that it informs the plan that must address the
specific RPA Outcome. Thus, the initiative categories can also inform the RPA when it
is converted into questions when doing the assessment.
6.3.1. Demand fixing
Demand for the venture’s concept (value proposition) is the main driver of a business.
No customers means no sales means no business.
At this point it is necessary to evaluate the past (preferably 6 months) and project the
future (min six months preferably 24 months)
52
Demand requires pursuing markets through any one or more of the following
practices:
Penetration of existing markets
Market expansion
Pursue alternative markets
Alternatives access (Channels) methods
Other
It is obvious SMME&Cs are limited in the use of all the alternatives. Specific practices
must therefore be identified by the forum. This is also relevant to the strategy
initiatives that follow.
6.3.2. Operations and appropriation fixing
Fixing operational capacity to appropriate the value concept (products or services) can
take many forms depending on the venture itself. Such practices may include
alternative operations, improved productions, changing supply access and more.
6.3.3. Value model alteration or improvement
Value models for SMME&Cs are often limited to very basic provision of products.
The smaller the venture, the more this is so. A value model is at heart what the
business is about.
Value models suffer mostly from changes in the external environment especially
a.r.o. technology and globalisation that changes across borders. This brings about
substitute products for the customer to choose from.
The forum should challenge the existing model (done in QRPA) and advice the
strategy.
6.3.4. Liquidity and finance fixing
53
Most turnarounds and business rescues require some form of financial restructuring.
This is either to support alternative appropriation capacity, fund alternative product
lines, expand with alternative supply chains etc. Alternatively it is to fix cash flows by
means of payment plans and cash cycle improvement.
6.3.5. Caveat addressing
If there are caveats, the forum must decide how to address them. Often, if some
caveats cannot be overcome, they are fatal to the survival of the venture in its
current state.
6.3.6. Error and risk overcoming
Addressing risk goes hand in hand with caveat addressing. Small firms are typically
more prone to demand, price, location changes such as a large competitor entering
the area through for example a giant superstore or supplier opening in close
proximity.
6.3.7. Acumen transfer
Often, SMME&Cs lack
acumen access. A forum
could be the first step in
overcoming such
shortcoming. This is
even more so for
turnaround and rescue
acumen. The
competencies12
12 Pretorius, 2014, A competency framework for the business rescue profession. Acta
Commerci 14 (2) Artikel #227, p1 - 15.
http://www.actacommercii.co.za/index.php/acta/article/viewFile/227/325
54
required by such individuals have been described to include sense-making, decision
making, collaboration and integration that culminates in the supra competency of
navigation towards a “better position”. See also the associated diagram.
It is clear that acumen requirements are highly specialised and can hardly be
obtained through basic explicit knowledge transfer.
Research has also shown that little knowledge13 has been transferred from BRPs to
entrepreneurs and directors of distressed businesses that came out of business
rescue [or not]. This confirms the importance to understand the difficulty by which
acumen transfer takes place.
It is purported in this research that acumen transfer should be prioritised for all
interventions by the sector overall. Cooperation with the TMA is advisable in this
regard.
6.3.8. Other
Depending on the specific context of each distressed venture, there may be additional
factors to pay attention to.
6.4. Generic strategies to inform decision options
What follows in this section are practices that are associated with generic strategies
available to a distressed (and going concern) ventures to pursue within the specific
RPA Outcome.
6.4.1. Generic strategies based on a TAS
13 Burke-Le Roux, A. & Pretorius, 2017, Exploring entrepreneurial learning during
formal business rescue process: insights from the South African experience. Southern
African Journal of Human Resource Management, doi:10.4102/sajhrm .v1510.733
1-15.
55
Already described in the literature are strategies to respond14 to the various TASs that
is part of the response to the RPA. Each strategy is supported by practices that may
contribute to achieving the relevant generic strategy. The diagram proposes some
practices for the four sets of turnaround strategies. Forums must deliberate the
relevance of each as it is linked to the RPA. See also Sub-section 4.2.2.1 to recognise
the links between the symptoms/indicators related to this diagram of practices.
The diagram shows practices, initiatives and actions that can be used to respond to
the outcomes of an RPA. Forums could consider each for relevance to the specific
distress context. It is hardly possible to be prescriptive on the selection. Selection of
practices are often determined by the competency levels of the practitioners involved
and thus governed by acumen.
The four strategies depend on the specific TAS and are:
Sustainability strategy that addresses retention of the performance in
response to a performing well TAS.
14 Pretorius, 2008, When Porter’s generic strategies are not enough: Complementary
strategies for turnaround situations. Journal of Business Strategy 29 (6) 19 - 28.
http://www.emeraldinsight.com/doi/full/10.1108/02756660810917200
56
Efficiency strategy that addresses turnaround for an under-
performing TAS
Forced repositioning strategy when a venture is faced by a strategic
distress TAS.
Last resort strategy for ventures where distress is categorised as crises
TAS and rescue is consider. Often times, liquidations should be
alternative.
6.5. Summary
Chapter 6 pointed towards key initiatives to inform the intervention strategy plan
(Chapter 5) which is compiled in response to the RPA Outcome (Chapter 4).
This chapter proposed a list for the forum to enhance their decision making.
A wide variety of practices do exist do exist within each TAS. The elements presented
should be considered by the forums for relevance for the venture under consideration.
57
Small Business Distress and Recovery Principles
Chapter 7
Summary and conclusions and
recommendations
58
7. SUMMARY AND THE WAY FORWARD
Chapter 6 has mostly stated and elaborated the concepts from the different literatures
and researches executed. This chapter however expands to some extent on the basics of
turnaround situations, generic principles and strategies in turnaround.
Summary of recomendations of this report:
7.1. Business Rescue
7.1.1. Monitoring of “approved” BRPs (BRP rating)
It is recommended that government departments organisations that are authorised
to appoint or ratify the appointment of BRP’s do so in accordance with the strictest
requirements. Similarly, to the banking fraternity, government bodies should develop
an “approved” list of BRPs. BRP’s should be rated accordioning to their success rate
and compliance with the procedure. Furthermore, approved BRP’s should be part of
a professional body.
7.1.1.1. Legislative amendments
We recommend that the following two areas of legislation be reviewed.
7.1.1.1.1. BR for SMMEs
A modern SMMEs restructuring and insolvency framework should address the
specific challenges of these types of businesses on both the micro- and
macroeconomic level.
SMME’s retain limited resources therefore causing a financing problem in
insolvency that should not be solved by denying such businesses access to
proceedings. In most cases, business rescue will not be a viable option for SMMEs
if the company does not have sufficient resources to cover at least the expenses
of the BRP. Denying orderly collective proceedings for the SMME sector may
result in viable high growth firms from foreclosing. We therefore suggest that
special rules be created for BR to assit exclusives SMME’s.
7.1.1.1.2. Insolvency Act – “fresh start”
59
South Africa currently has an old insolvency system that is not conducive to
growth or SMMEs. An insolvency system covering SMMEs should acknowledge
the characteristics of this sector and aim to maximize assets and preserve the
company on one hand and provide for discharge and a fresh start for the
entrepreneurs involved on the other. The goal would be to distinguish the effects
of insolvency on the enterprise from those on the individuals behind the
enterprise. Continuity is possible for an incorporated entity, but more difficult
for an individual operating without the protection of incorporation.
7.2. Turnaround
7.2.1. Establish charter for distressed businesses
The report proposed the Charter as the main prerequisite to address/overcome the
reported fragmentation effect hampering collaboration. The Charter is the governing
structure of the proposed forum process. Without a Charter structure, conditions for
cooperation are limited.
7.2.1.1. Use existing resources (Productivity SA; Mentors ect..)
It should be emphasised here that the recommendations made under the charter
and forum do not require additional resources to be allocated. This study has
identified adequate resource (excluding acumen) availability to implement
both the charter principles and forum concept. The charter should be designed
to better utilise the resources already being allocated to distressed business
across the economic cluster.
7.2.1.2. Forum structure
The forum concept addresses improved decision making by addressing
stakeholder support, access to acumen, improved governance and management.
Forums allow for flexibility and responding to the specific distress situations
while it can be seen as the first step in acumen development.
7.2.1.3. Generic assessment for unique venture
60
Assessment by the forums are proposed to be somewhat standardised in order
to optimise the limited resources for turnaround and business rescue within the
economic cluster structure. The proposed methodology of the QRPA is merely a
starting point and could be enhanced. It however appears adequate for the
SMME&C industry. Assessment should be regular (proposed as quarterly at
least).
7.2.2. Unique response to RPA
Every venture is subject to its own contextual factors and therefore distress may take
many forms. While generic factors may exists, they manifest differently in individual
ventures. Therefore, the QRPA is a framework that could guide decision making. A
standardised yet flexible analysis tool will be hugely beneficial to any turnaround
efforts.
7.2.3. Distressed grant requirements
As the state considers availing distressed funding to SMMEs, it is recommended that
this is done with caution. The state should avoid advancing any grant or non-interest-
bearing loan to distressed companies. One of the key indicators of viability is the
firm’s ability to successfully emerge from turnaround without subsidisation. If grant
funding is awarded, this may disguise deepening insolvency and keep non-viable
firms operating. Distressed financing (ex: as provided by IDC) is expensive and should
only be reserved to firms that show a reasonable prospect of successful turnaround.
IDC requirements are shown on their website15
7.2.4. Turnaround advisor’s qualifications
While BRP’s must adhere to strict qualification and expertise requirements this is
often not the case with turnaround advisors. This is very concerning. It is highly
recommended that ordinary mentors or business consultants are not automatically
regarded at turnaround advisors. The field of turnaround management is highly
specialised and consultants in this field must show distinctive competences in order
15 www.idc.co.za : https://www.idc.co.za/press-releases/2010/102-idc-allocates-r31-
billion-to-distressed-companies.html
61
to be effective. Close cooperation with the TMA should be sought as it is an
accredited body.
7.3. Retention
7.3.1. Aftercare support & budgeting
It is recommended that a proportion of the funds allocated to SMMEs be reserved
for aftercare support. Statistical analysis of the SMME sector shows a high failure
rate. While this is not abnormal, if turnaround services are to be made available then
it should be proportionately budgeted. Any SMME funding or grants should be made
in view of possible future turnaround support.
7.3.2. Regular monitoring as prerequisite
There is a need for early cognition of distress which is mostly absent in SMME&Cs
and therefore the Distress Charter guideline of regular monitoring as a prerequisite
for the forum functioning. This enforced trigger point is most useful for activating
and improving basic management in SMME&Cs – therefore avoiding distress.
7.3.3. Shift measurement from start-up numbers to sustainability (“single customer
dependency”)
In order to reduce the number of SMME failures and increase the retention rate a
mindset shift is necessary. Currently, SMME growth is primarily measured on the
quantity of SMME’s and jobs created. We highly recommended that the new focus
should look at SMME sustainability. The effectiveness of state support to SMME’s
should measure how sustainable these firms are rather than only how many exist or
number of jobs they create. ‘Single customer dependency businesses’ should be
flagged as high risk. If this mind shift does not take place, our efforts within the
SMME sector will have little effect on the much needed job creation over the long
term.
62
7.3.4. Acumen creation
Turnaround and business rescue acumen is the resource that is extremely scarce,
not only for SMMEs but generally. It has been clearly described by the acumen
paradox. The forum is the first step in addressing this shortcoming. The research
showed clearly that currently, the turnaround and business rescue acumen of
advisors in the sector is low and problematic to some role-players. It is proposed that
expert panels should be built to assist forums when required in order to start the
acumen transfer process.
7.3.5. Distress Charter as prerequisite to address collaboration
The report proposed the Charter as the main prerequisite to address/overcome the
reported fragmentation effect hampering collaboration, coordination, alignment and
information sharing. The Charter is the governing structure of the proposed forum
process. Without a Charter structure, conditions for cooperation are limited.
7.3.6. Forum as concept (vehicle)
The forum concept addresses improved decision making by addressing stakeholder
support, access to acumen, improved governance and management. Forums allow for
flexibility and responding to the specific distress situations while it can be seen as the
first step in acumen development. The forum typically has the decision making
functions associated with a board of directors.
7.3.7. Regular monitoring as prerequisite
There is a need for early cognition of distress which is mostly absent in SMME&Cs and
therefore the Charter guideline of regular monitoring as a prerequisite for the forum
functioning. This enforced trigger point is most useful for activating and improving
basic management decision makingin SMME&Cs.
7.3.8. Generic assessment for unique venture
Assessment by the forums are proposed to be somewhat standardised in order to
optimise the limited resources for turnaround and business rescue within the
63
economic cluster structure. The proposed methodology of the QRPA is merely a
starting point and could be enhanced. It however appears adequate for the SMME&C
industry.
Assessment should be regular (proposed as quarterly at least).
7.3.9. Unique response to RPA
Every venture is subject to its own contextual factors and therefore distress may take
many forms. While generic factors may exists, they manifest differently in individual
ventures. Therefore, the QRPA is a framework that could guide decision making.
7.3.10. Acumen creation
Turnaround and business rescue acumen is the resource that is extremely scarce, not
only for SMMEs but generally. It has been clearly described by the acumen paradox.
The forum is the first step in addressing this shortcoming.
The research showed clearly that currently, the turnaround and business rescue
acumen of advisors in the sector is low and problematic to some role-players.
It is proposed that expert panels should be built to assist forums when required in
order to start the acumen transfer process. A distinction is required between business
advisor acumen and turnaround/BR acumen. This research indicated that BA acumen
is low which leads to poor aftercare when investments are made leading to low
retention and sustainability. On the other hand, TA/BR acumen is almost not existing
and will require large amount of resource inputs to address it meaningfully.
7.4. Specific recommendations for considerations
What follows in this section are recommendations (after feedback meetings) for the
specific interventions associated with the Charter and Forums:
7.4.1. Charter interventions and considerations
The report proposed the Distress Charter as the main prerequisite to ensure
cooperation, coordination and collective responsibility.
64
7.5. The way forward
It is proposed that the economic sector considers the report especially for agreement
on the Charter principle followed by the forum concept. Thereafter guidelines need to
be established and agreed upon for operations of the forums.
The proposed action program contains 9 activities with timelines to be pursued. It is
important that these are proposed by the research team therefore representing their
insights from theresearch process.
Also submitted are proposed additional initiatives to be considered by the DC for
urgent attention.
Extensive training of advisors will be beneficial to begin addressing the rescue and
turnaround acumen shortage.
Agreement on the proposed QRPA methodology (or other) should begin as part of the
forum guidelines. Annexure B is shown as an example of a RPA outcome purely serve
as a case example of how decision making by the forum could be influenced by its use.
A one day intervention for advisors to introduce the complexities of the Act and
proposed proseses from the report will be done at the DSBD aarrangements and
venue as soon as the report has been accepted. However, an extensive program is
required .
The proposed project program is presented as as a recommendation:
Proposed action program for DSBD
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7.6. Chapter Summary
In line with the brief of this research, a framework was presented (Figure 4.1) that
proposed a process with steps for the sector to consider. This may guide addressing
the constraints currently faced by the sector.
66
Specifically, this report presents the QRPA to establish assessment on a regular basis
for SMME&Cs supported by government structures.
67
ANNEXURE A.
See Report 1 of 2
68
ANNEXURE B – Integrated case study: RPA outcome example
Case study example of recent anonymised SMME where RPA was applied (R20 million annual T/O).
Business name: XYZ Tech – Furniture manufacturing
RPA framework score = 21.7
Interpretation: Operational distress moving towards Strategic distress
Severity Evaluation: is urgent in response to entering crisis
Table 1 Application of the reasonable prospect assessment (RPA) score for different
turnaround situations when operating in the ZoI (Pretorius, 2017 in press)
Business
Categorization
Affordance scores allocated
D AC PM LF FC
** RC RE
Max
Score
Log
score
RPA
Distressed
Business 1.5 1.75 2.75 1.75 1 3.6 0.3 45.48
1.66 21.7
Scoring: Judgments from observers
*Clear path to best-envisioned endpoint (4) = confirmed future existence, sustainable
Healthy status with potential path (3) = Currently exist, assumed future existence under
proper management
Questionable and unclear path (2) = Currently danger levels, doubtful, improbable, (Quantify
in RE)
Absent (1) = Non-existing path or beyond fixing
Risk and Error - Doubt/Uncertainty about accuracy of factual information at the decision point
in time
**Fatal caveat: Exist=0, None=1
RPA Score RP = ∫ (aD + bAC + cPM + dLF) x eFC x fRC x g(1-RE)
Where
RP = reasonable prospect; ∫ = function of; D = Demand for selling the concepts; AC =
Appropriation capacity for the concept; PM = Profit model; LF = Liquidity and financing
model; FC = Fatal caveats; RC = Rectifiable caveats influencing performance; RE = Risk and
error: a – g = constants determining level of judgement.
69
Figure 1
Reasonable
prospect
assessment with
RPA scores to
guide assessment
1 Demand appears
to exist
2 Appropriation
capacity exists
3 Management
strive creates
suspicion and needs
in-depth investigation
3 BM profitability suspect – needs investigation
4 Confirmed by opportunity score of 78 – 2 rectifiable caveats suggesting dangerous turnaround
opportunity
Cross check - Opportunity for distressed business
Opportunity Score = 78 + (2 x RC and 0 FC)
Interpretation:
Explanation of the scores
Above 131 Excellent turnaround opportunity
101 to 130 Good turnaround opportunity to pursue
81 to 100 Turnaround opportunity need some work – there are some critical issues to
overcome
Below 80 Dangerous turnaround opportunity – potentially there are some key flaws
Beware of any scores equal to one – investigate those before proceeding even when the score is
above 100
From Sub-section 6.3 it is now possible for the
forum to direct there decision making
63.4
35.628.8
18.9
9.6 8.02.5 0.0
63.4
0.0
10.0
20.0
30.0
40.0
50.0
60.0
70.0
Reasonable Prospect ( Framework score)
BRiL or Doubtful RP
Reorganise RP
70